Pension scheme members may be unaware they are indirectly investing in high-value speculative technology assets, Blick Rothenberg has warned.

The advisory firm noted that some people may have become indirect investors in these assets through their workplace scheme or self-invested personal pension (SIPP), even if they had never made a direct investment decision.

“Many pension savers are invested in passive funds that track broad US, global or technology-heavy indexes,” said Blick Rothenberg director, Artur Vorobyev.

“If high-value speculative technology assets are included in those indexes, funds tracking them may be required to buy the shares, not because the fund manager has made an active judgement that the valuation is attractive, but because the index rules require it.”

Vorobyev noted that index inclusion can create market price increases created by automated rules-based triggers, rather than human demand.

Passive funds aim to replicate indexes; therefore, if a company is added to an index, the funds tracking that index need to gain exposure.

For large and widely followed companies, this can result in significant demand from institutional investors and pension schemes, Vorobyev explained.

However, he warned that this comes with risks, including valuation risk, whereby a technology asset comes to market at a significant valuation that still relies heavily on future delivery.

“If market expectations change, the share price could be volatile,” Vorobyev stated.

“For pension savers, this means the value of the part of their pension invested in speculative technology assets could rise or fall sharply if the company’s share price is volatile.”

The second risk highlighted was index timing, as while passive funds may be required to buy once a speculative technology asset is included in a relevant index, this may happen after the initial public offering.

The risk for pension investors is if their scheme invests after the initial period of excitement has already driven the price up, they could be exposed if the share price later falls.

“Another risk is that pension savers, through passive index funds, may be buying immediately because index rules require it, while early investors may later be selling because their lock-up restrictions have expired,” Vorobyev said.

“And pension funds may be buying the shares automatically at the same time as early investors are preparing to sell. This could increase the risk of savers being exposed to short-term price falls.”

However, Vorobyev noted that the positive side of index funds is they enable ordinary pension scheme members to access the growth of major listed companies at a relatively low cost.

“If a speculative technology asset continues to grow and becomes a successful long-term listed business, pension savers may participate in that upside,” he continued.

“In that sense, public market access can democratise investment opportunities that were previously available mainly to founders, employees, venture capital investors and private market funds.”

---